Are Royal Bank Of Scotland Group plc and Barclays plc contrarian buys?

Check a share price chart for Royal Bank of Scotland (LSE: RBS), and you’ll see the share price crash in the depths of the Credit Crunch in 2008, recover a little and fall once again around the time of the Eurozone crisis in 2011. It recovered again, and then fell again. And now? We’re back down to the levels it reached during the worst of the Crisis.

The picture is very similar with Barclays (LSE: BARC), with the share price once again touching its lows. With the share prices so cheap, are these two banks now contrarian buys?

The banks have flattered to deceive

I’ve talked up the banks many times in recent years. Yet so far, they’ve flattered to deceive. Why? Well, perhaps because I hadn’t realised the scale of what has been happening around the world.

Over the past few years people have repeatedly predicted that interest rates in this country will rise imminently. Time after time, they’ve been proved wrong. The situation is the same in the US, and in most other developed markets.

Interest rates were going to rise in 2015. Then 2016. Then 2017. Yet no such rise ever materialises. Why? Because our viewpoint of monetary policy and global finances is stuck in the past. We still think our economy is as it was in the 1990s, when interest rates were maintained around 5% to make sure that great demon, inflation, was kept under control.

But today we’re faced with a world that has vastly greater production capacity than it has ever had before. This means deflation, and not inflation, is now the threat. That’s why I suspect we’ll never see 5% inflation again in our lifetimes. I think interest rates will stick at around 0.5% for a long time to come.

And then there’s another thing that I underestimated: the reputational damage that the banks suffered. The amount of money paid out in fines and litigation, particularly regarding the PPI scandal, is astonishing. Banks have gone from being stalwarts of the British establishment to the lowest of the low. The reputational damage will be repaired, but it will take many years to do so.

Patient investors should buy back into Barclays

But if we compare RBS and Barclays, I think RBS is in a far worse state. The ill-timed takeover of ABN Amro almost destroyed the bank, and the recovery will be painfully slow.

However, I’m more optimistic about Barclays. The credit card side of this business is still going strong. And the battered investment bank I expect will recover as a global equity bull market takes hold over the next decade. There’s less bad debt, and I suspect in a year or two Barclays will be reporting a modest statutory profit. I wouldn’t expect the multibillion pound earnings of yesteryear, but I’m optimistic that a gradual recovery is on the cards.

So my advice is to still avoid Royal Bank of Scotland, but to begin to cautiously buy back into Barclays. In the long-term, a patient approach will reap dividends.

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Prabhat Sakya has no position in any shares mentioned. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.